...Cost-Volume-Profit (CVP) Analysis Shanica N. Todd-Higgins ACC/561 - ACCOUNTING Instructor: DAVID DUREN Schedule: 06/29/2015 - 08/03/2015 Campus: COLUMBIA SOUTH CAROLINA CAMPUS Group ID: SCMBA0914 CVP - What If Analysis Through research, according to Diane Wicks (2015), “Cost-volume-profit (CVP) analysis is used to assess the impact of potential changes in costs and volume on a company's operating profit and net profit. CVP analysis is also useful in making decisions regarding pricing of products, selection of product lines and utilization of production equipments. Additionally, CVP is at the heart of methods used for calculating the break-even point and sales levels necessary to attain targeted income levels.” The break-even point according to W.D Adkins (2015) is, “the point at which revenues are just enough to cover expenses so there in no profit and no loss.” For instance Calculating Breaking-Even Analysis There are many steps in finding the break even analysis. According to Zari Ballard of Ehow (2015, ), First, calculate the total fixed costs by adding together each of the company's fixed costs. For example, a small company with annual fixed costs of $7,000 in rental payments, $3,000 in equipment leases and $30,000 in administrative salaries would have TFC of $40,000. Next, calculate the contribution margin per unit by subtracting the variable cost per unit from the sales price per unit. For example, if a small company's product sells for $60 per unit with...
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...CVP Analysis is a powerful tool managers use; as it helps them in understanding the interdependency or relationship between cost, volume and profit in an organization mainly by focusing on interaction between elements such as a: Product Price b: Level or volume of activity c: Per unit variable cost d: Total fixed costs e: Mix of products sold. Assumptions: The cost volume profit analysis assumptions suggest that the selling price does not change and remains constant as the volume changes. As costs are liner as a result of which they can be accurately divided into variable and fixed element. The fixed element remains constant in total over the relevant range and the variable element is constant per unit. On the other hand when considering multi-product companies, the sales mix is constant. Limitations of CVP Analysis It is limited in the amount of information it can provide in a multi-product operations. Multi-product businesses, such as restaurants, can have a difficult time with CVP analysis because menu items, for instance, are likely to have many variable cost ratios. This makes the challenge of CVP analysis all the more difficult because it must be done for each specific product. As it is a short run, marginal analysis therefore it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between variable and fixed costs but in the long...
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...Cost-Volume Profit Analysis Cost-Volume-Profit (“CVP”) analysis is essential for any company to be able to determine break-even points, and determining short term decisions. Arguably, for small businesses, nothing could be more important, as CVP provides the minimum volume of a product needed to sell in order to experience neither a gain nor loss. For entrepreneurs it is important to be effective and efficient when utilizing CVP accounting processes. This provides the framework for analyzing CVP’s importance to entrepreneurs. Defined, cost-volume-profit analysis is “the study of the effects of changes in cost and volume on profits” (Kimmel, 2011). CVP is critical in profit planning, determining selling prices, and helps determine the minimum number of future sales. Underling CVP are the assumptions that both cost and revenues are linear, costs can be classified as either fixed or variable, and one changes in activity or volume affect costs (Kimmel, 2011). CVP helps entrepreneur’s asses how much contribution is made on each product and how many units to sell in order to cover fixed costs. “[CVP] can [also] be used to determine whether efforts would be better directed toward the reduction of fixed costs or of variable costs” (Crowningshield, 1986). Margin of Safety as it relates to cost-volume-profit measures the difference between actual sales and the break-even point. Margin of safety enables management to determine allowable sales risk when introducing...
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...beginning to show their age and a need for newer types of operations to compete with foreign firms emerging, PeopleSoft was looking for a way to create a profitable company. Both founders saw the opportunity of enterprise resource planning as a new technology which would take off in future years.[2] The takeover of PeopleSoft by Oracle was a long and complicated legal and public opinion battle. The takeover itself had several reasons but one was the most significant. To begin Oracle was increasingly finding it was in a market which was becoming more competitive. As technologies age and patents expire new firms are taking market share away from the dominant firms. As the newer more competitive firms began to succeed, Oracle began to see profit margins decrease. Oracle was being forced into a corner with few choices for successful operations in the future. The maturing market which it found itself a part of was not going to bring it the same level of...
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...mainly concerned with the preparation of internal financial information to be used by the managers to run the business more effectively. This information can be used in decision making, planning, and control. Management accounting is dealt with in another module of your course. Management Accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for the following: • Formulating strategy • Planning and controlling activities • Decision making • Optimising the uses of resources Key Definitions a) Cost unit- the cost of an item a product or service. This could be a single item, a batch, a contract what ever is appropriate for the organisation. b) Cost classification - to group costs for analysis and control purposes c) Cost centre - a function or location for which costs are ascertained dividing into production (primary) and service (secondary) areas. 1. THE...
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...TABLE OF CONTENT Executive summary……….………………………………………………………2 Background…………………………………………………………………3 Analysis of company situation………………………………………………....4-8 Analysis on market situation...............…………………………………….....9-12 Swot and competitor analysis ………………………………………………12-15 New product for McDonalds………………………………………………...15- 19 Future marketing strategy..................................................................................19-21 Financial forecast............................................................................................21-22 Conclusion……………………………………………………………......22 Appendix …………………………………………………………..........23-24 References…………………………………………………………….....25 INTRODUCTION Health care system is critically important around the world. And health care industry has always been a subject area with a strong international dimension. The health-care industry incorporates several sectors that are dedicated to providing health care services and products. According to industry and market classifications the health-care industry includes health care equipment and services as well as pharmaceuticals, biotechnology and life sciences, nursing homes, providers of health care plans and home health...
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...Chapter 9 Profit Planning: Cost-Volume-Profit Analysis Cases |9-1 |Cost-Volume-Profit Analysis and Strategy | |9-2 |Cost-Volume-Profit Analysis and Cost Estimation | |9-3 |Cost-Volume-Profit Analysis and Strategy | |9-4 |Cost-Volume-Profit Analysis and Strategy: The ALLTEL Pavilion | |9-5 |Sensitivity Analysis; Regression Analysis | |9-6 |Profit Planning: Choice of Cost Structure | |9-7 |Pancake World | Readings 9-1: “Tools for Dealing with Uncertainty” by David R. Fordham, CMA, CPA, Ph.D and S. Brooks Marshall, CFA. DBA This article explains how to use simulation methods within a spreadsheet program such as Excel to perform sensitivity analysis for a given decision context. The available spreadsheet simulation software systems include the programs Crystal Ball and @Risk, among others. These software systems allow the user to analyze the effect of uncertainty on the potential outcomes of a decision. These tools can be applied directly to CVP analysis. The tools allow...
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...factories : Selling price per unit Variable cost per unit Fixed cost Depreciation included in above Sales (Units) Capacity (Units) You are required to determine : * Output Break-even-points for each factory. * Capacity Break-even-point for each factory. * Cash Break-even-point for each factory, * Which factory is more profitable ? * B.E.P. for company as whole assuming the present product-mix. * B .E.P. for company assuming that product-mix can be changed as desired. 2. There are two similar plants under the same management. The management wishes to merge these two plants and to run them as one integrated plant. The following particulars are made available : Plant-I Plant-II Capacity in operation 60% 100% Rs. Rs. Sales 1,20,000 3,00,000 Variable Costs 90,000 2,20,000 Fixed Costs 25,000 40,000 You are requested to compute : (i) What would be the capacity of merged plant to be operated at break-even ? (ii)What would be the profitability on working at 75% of the integrated capacity ? 3. 1st Year 2nd Year Sales Rs. 3,60,000 Decrease in sales price and decrease Margin of Safety 25% in fixed costs are the only changes Profit volume Ratio 30% Margin of safety 30% Profit volume Ratio 25% Required : * Decrease of sales amount in IInd year. * Decrease of fixed cost in IInd year. * New profit in IInd year. * New BEP in IInd year. ...
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...Lecture 5: Cost-Volume-Profit Analysis In this module, we are going to discuss a simple concept yet a powerful financial planning and decision-making tool for managers. This concept is called CVP analysis or cost volume profit relationship. Profits are the difference between revenues and costs. Both revenue and cost depend on the volume of operations. So, in the short run whether you make a profit or a loss depends upon the volume of sales you make. What is the unknown for a manager when he or she tries to project profits for future? The managers know the costs and the selling price. So the only unknown is the volume of sales. The importance of CVP analysis flows from the fact that it emphasizes the inter-relationship between costs, volume of sales, and selling price, and therefore it represents a unified picture of all financial information in a simple framework. What effect on profit can American Airlines expect when it adds a new flight on the Dallas Chicago route? How many patient days of care must Dallas Children’s hospital provide in order to cover all of its operating costs? How will the profits for Texas Instruments change if it sells 10% more of its DLP chips? Each of the above questions concerns the effect on cost and revenues when an organization’s activity changes. CVP analysis summarizes the effects of changes in organization’s volume of activities on its costs, revenue and therefore profit. Although the word profit appears in CVP analysis, this analysis...
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...Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control MEMO To: Dr. Thomas Russell, Executive Director, Bridgestone Behavioral Health Center From: Sheryl Marshall, Service Consulting Plus, LLC. Date: 8th September 2014 Subject: Financial performance of Bridgestone Behavioral Health Center over the next one year. Dear Dr. Russell, After having done a detailed study of the projected financial statements for the upcoming year, we have been able to identify a few glaring financial pitfalls the center has to beware of. The center has a lot of government aid provided to it but it also faces a host of challenges as the government has put various limits and caps on its volume and performance. These are the key features to be looked at when analyzing Bridgestone’s financial capabilities:- * The company receives Medicaid from various sources to facilitate its services. Key sources include the state government and certain private pay customers. * The projected budget indicates a certain level of volume which must be achieved for meager profits or breakeven. * The various facilities provided by the company include both on-campus and off-campus services, the major ones being – Group Counselling and Ambulatory Detoxification. The center’s financials show that it is just staying afloat for the past three years, despite exemplary staff performance...
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...enterprise successful today may no longer be sufficient next year. A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition. I do agree with the notion of value costing for the 21st Century organizations. Traditional accounting systems distribute indirect costs on the basis of direct labor hours, machine hours, or material costs. This leads to a distorted picture. The costs of products and services must be accurate, or management can be misled. In the last 15 years value costing has been at the forefront for businesses in the 21st century. New cost concepts allocates costs to the things people are doing in companies and assures that these costs are paid by the products that generated them. Virtual enterprise and efficient supply chain management systems will shape the future of these enterprises. Organizations are trying to become agile enterprises with the help of strategic alliances of firms and integration using information technologies. Traditional performance and cost measures are no longer suitable for developing and managing enterprises in the new environment. In order to remain relevant and to add value, cost and performance measures must be designed and systematically evaluated to reduce the often-unnoticed mismatch between strategic goals and operational tactics. Traditional costing systems provide precise, objective, verifiable and good information for external reporting purposes...
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...are two types of cost information, variable and fixed costs. Variable costs are costs that change when some variable used in the cost to produce a product changes. For example if you were in the business of producing knives, then the price of the metal used to manufacture those knives would be your variable cost. Another variable cost that has to be accounted for in the cost of manufacturing is labor costs and supply costs. So the variable cost for each knife manufactured would equal the variable cost of metal + the variable cost of labor + the variable cost of supplies. Once you have calculated those costs you can take the total and multiply it by the total number of knives you wish to manufacture and you have your variable cost of knives. Fixed costs are costs that are not dependant on materials used in manufacturing and are dependent on an amount of resource that is required. An example of a fixed cost would be depreciation expense or salaries paid. Cost information can determine many variables in a company, the first variable being pricing of products. In most businesses the market determines the price and supply and demand play a big role in this determination. If supply is low and demand is high the price will most likely be a lot higher than if supply is high and demand is low. Businesses also use cost plus pricing where and organization can set its price according to product cost. Budgeting is also a major factor that accountants use to determine costs and pricing. Budgets...
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...Backstreet Dreams (1990) The Wild Life (1984) 2 The Sentinel (2006) Cellular (2004) 8 Mile (2002) L.A. Confidential (1997) The Getaway (1994) Batman (1989) Hard Country (1981) 15.963 [Spring 2007] Managerial Accounting & Control Main Line vs. Basinger Evaluate the defense argument that Mazzocone “has a duty under the law to minimize his loss, and this does not include going out and making a picture knowing you are $2m short. At what stage in the negotiations did Basinger withdraw? If late, it is possible some costs were contractual obligations (such as rights to script) at the time, and these obligations were assumed with the presumption of Basinger participating. Managerial Accounting & Control 3 15.963 [Spring 2007] Main Line vs. Basinger What were Mazzocone’s options following Basinger’s withdrawal? Do not make movie – this assumes all costs sunk. Make with another actress – this assumes some cost recoverability. How does this relate to example in previous class about airline pricing? Evaluate the following claim: “at the time of Basinger’s withdrawal, Mazzocone was faced with a short run decision.” Does loss minimization imply not making the movie, as suggested by the defense? Managerial Accounting & Control 4 15.963 [Spring 2007]...
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...Target Profit And Break Even Analysis; Case 4-33; Managerial Accounting Case 4-33: Cost Structure; Target Profit and Break Even Analysis Question 1: Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agents’ commission remains unchanged at 15% $12,000,000 in sales is needed to break even while employing an outside sales force with commissions of 15% of sales. b. The agents’ commission rate is increased to 20% $13,714,286 in sales is needed to break even while employing an outside sales force with commissions of 20% of sales. c. The company employs its own sales force. $15,000,000 in sales is needed to break even while employing the company's own sales force with commissions of 7.5% of sales. Before Pittman Company’s break-even point in sales can be determined, we must initially “reformat” the provided Budgeted Income Statement for the Year Ended December 31 (for the next year) to reflect a Contribution Income Statement format. The reason for this application is to separate the Variable and Fixed costs associated in selling telecommunications equipment to derive pertinent data needed to determine break even sales. The restructuring of each Income Statement may be found in Appendix A of this report. Reformatting the Income Statement allows us to determine first, the Contribution Margin. The Contribution Margin is significant in determining Break-even point whether by the number of units to break even...
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...Dreams (1990) The Wild Life (1984) 2 The Sentinel (2006) Cellular (2004) 8 Mile (2002) L.A. Confidential (1997) The Getaway (1994) Batman (1989) Hard Country (1981) 15.963 [Spring 2007] Managerial Accounting & Control Main Line vs. Basinger Evaluate the defense argument that Mazzocone “has a duty under the law to minimize his loss, and this does not include going out and making a picture knowing you are $2m short. At what stage in the negotiations did Basinger withdraw? If late, it is possible some costs were contractual obligations (such as rights to script) at the time, and these obligations were assumed with the presumption of Basinger participating. Managerial Accounting & Control 3 15.963 [Spring 2007] Main Line vs. Basinger What were Mazzocone’s options following Basinger’s withdrawal? Do not make movie – this assumes all costs sunk. Make with another actress – this assumes some cost recoverability. How does this relate to example in previous class about airline pricing? Evaluate the following claim: “at the time of Basinger’s withdrawal, Mazzocone was faced with a short run decision.” Does loss minimization imply not making the movie, as suggested by the defense? Managerial Accounting & Control 4 15.963 [Spring...
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